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U.S.: Corporate Scandals Put Capitalism Under Europe's Microscope

  • Breffni O'Rourke

The financial scandals in U.S. corporate life involving such major companies as Enron and WorldCom have shaken confidence in American business methods. Questions are being asked about whether the same could happen in Europe, and if so, whether that would indicate a basic flaw in capitalism.

Prague, 23 July 2002 (RFE/RL) -- The scandals in the United States over the use of false accounting methods by major business corporations are reverberating around the world.

Coming a decade after modern capitalism triumphed over socialism, these scandals have raised issues about the susceptibility of the capitalist system to corruption.

Seeking explanations, commentators have noted that the present problems are largely rooted in the hectic atmosphere of the 1990s, a period compared to the 1920s for its excesses. That's because the arrival of new technology, the so-called "dot-com boom," fed wildly optimistic expectations of vast profits.

Others have pointed to what they see as flaws in American business methodology and habits. For instance, "The New York Times" reporter Jeffrey Madrick recently said on Canadian television that when the performance of a company's chief executive is tied to what the company's stock prices are doing that same day, it is natural for a short-term focus to develop. Coupled with lax accounting methods, the temptation is to show big profits now and not to worry about what happens in the long term.

In Europe, there is a certain amount of "schadenfreude," i.e., taking pleasure in another's misfortune, or in this case, the discomfort Americans are now feeling.

Hungarian analyst Pal Tamas said that for years, Eastern Europeans were themselves mixing the real with the false in their business methods. "At the same time, they were listening to lectures from the American side telling them they are incorrect, [that] they are undeveloped. 'Have a look at how developed business is carried on. Have a look at what is going on in the [United] States.' And now I think they're quite happy to understand that these very developed American companies are doing the same as what they are doing at home," Tamas said.

However, Tamas, a member of the Hungarian Academy of Sciences, said that not only could U.S-style scandals occur in Eastern Europe, but that on a smaller scale they are, in fact, "happening every day."

Speaking on the subject in Paris, the director of Poland's Stefan Batory Foundation, Aleksander Smolar, said: "There is certainly one human problem, namely that the capitalist market economy is built upon [a] specific structure of incentives, in which people are striving to get as big profits as possible. And without strong moral limitations, it can lead, of course, toward corruption," Smolar said.

To control these impulses, Smolar sees not only moral influences as being necessary, but also an effective framework of legal regulation.

In Frankfurt, financial analyst Dirk Woelfer of investment advisers MMS International also pointed to the role of regulation, but he doubts that corruption can be entirely removed from the economic system, even if regulations are strengthened. "I have my doubts that it is fully controllable. I mean, you will always have some effort to bypass regulations," Woelfer said.

This time, in the United States, the rules and regulations did not stop malpractice. There is currently a debate under way there about whether, or to what extent, the regulatory framework should be strengthened.

But whatever the faults of the capitalist system, there are few who see any fundamental systemic change on the horizon.

In London, analyst Michael Marese of J.P. Morgan-Chase said there have been various financial scandals in the U.S. in most decades, going back to the 1870s. He said the current uproar is different only in that it involves a number of high-profile cases that were supposed to be spectacular successes but that instead came "tumbling down." He said the opportunity to earn huge amounts of money has led to "immodest greed."

But he said this does not necessarily mean that capitalism is a system more likely to breed corruption than any other system. "Let's look at socialism or any religion. Everything sounds great on paper, right? Almost everything sounds great -- all the utopian ideas of the 19th century. There was one after another which came out in Europe. They really sounded brilliant. But in practice there were problems," Marese said.

Speaking on the same theme, Smolar said there is "no practical alternative in today's world" to modern capitalism. "We can say that this is the price for a very high level of possible development, that in civilized countries, there is a legal structure beside moral norms that should prohibit and control pathological behavior," Smolar said.

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